March 29, 2021 S__tock___ TALES Stock Tales are concise, holistic stock reports across wider spectrum of sectors. Updates will not be periodical but based on significant events or change in price. Dixon Technologies (India) (DIXTEC) CMP: | 3624 Target: | 4270 (18%) Target Period: 15 months BUY March 29, 2021 Rising star in domestic manufacturing space... Dixon Technologies (DTL) is India’s leading electronic manufacturing service Stock Data (EMS) provider to various multinational/domestic companies in India. The company is one of the biggest beneficiaries of the government’s production Particular Amount linked incentive (PLI) scheme for mobile phones and other electronic Market Cap (| Crore) 21,222.1 products. We believe PLI benefits will start flowing in from Q4FY21E Total Debt (FY20) (| Crore) 82.8 onwards while in future DTL’s mobile revenue will grow multi-fold (~14x Cash & Inv (FY20) (| Crore) 100.1 jump) over FY20-23E. DTL has also applied for PLI in the lighting, electronic EV (| Crore) 21,204.8 wearables and other electronic products (laptop/notebooks). This opens up 52 week H/L 4588/ 624 a significant growth opportunity for DTL, going forward (we see 4x jump in Equity capital (| Crore) 11.6 Stock Tales Face value (|) 2.0 revenue FY20-23E). Further, prudent working capital management and Price Performance future expansion through internal accruals will keep balance sheet light and `f return ratios elevated (RoE: 39%, RoCE: 44%) for DTL, going forward. 5000 20000 Strong play in emergent domestic EMS industry 4000 15000 3000 10000 The Indian electronic manufacturing services (EMS) industry is likely to grow 2000 at a CAGR of 45% over the next five years to become a ~US$152 billion (bn) 1000 5000 industry. We believe the China+1 strategy by various MNCs alongside 0 0 various government measures will help boost domestic EMS industry, going forward. DTL being one of the largest EMS players, is well set to reap the Oct-18 Jan-20 Jun-20 Nov-20 Aug-19 Mar-19 benefits of said growth opportunities. The company’s manufacturing May-18 capacity in the LED TV, washing machines and LED lighting can serve ~26%, Dixon NSE 28% and 45% of total domestic requirements (in volume term), respectively. Focus to improve ODM for customer retention Key Highlights Strong play in government approved DTL’s share of original design manufacturer (ODM) revenue has increased PLI scheme for mobile phones manufacturing. Mobile phone revenue from 22% in FY17 to 34% by FY20, which has also helped in ~140 bps would see ~14x jump over FY20-23 expansion in EBITDA margin. DTL plans to increase ODM revenue share in consumer electronics from current 6% to 15% in the next two years, which Lean Balance sheet, strong return will help drive segment EBITDA margin higher. However, overall EBITDA rations and quality management margin is expected to remain flat in FY20-23E considering a significant rise Retail Equity Research Equity Retail in revenue from mobile business (OEM model). Risk to our call Delay/less volume offtake by key – Lean balance sheet supports strong RoEs, RoCEs clients in mobile segment DTL has registered healthy RoE, RoCE of 22%, 26%, respectively, in FY20. Strong competition from global and The future capex will largely be funded through internal accruals. We believe domestic EMS player restrict margin movement prudent working capital management and higher asset turn in the mobile business will result in higher RoE, RoCE, going forward. Valuation & Outlook Research Analyst Securities ICICI Sanjay Manyal We believe significant future growth potential in domestic electronic [email protected] manufacturing coupled with DTL’s plan to increase backward integration can bring in more customers and would lead to a revenue & earnings CAGR of Hitesh Taunk [email protected] 56% & 66%, respectively, in FY20-23E. We believe DTL may continue to command premium valuation due to its significant future growth opportunities, high return ratios and lean working capital days. We assign a BUY rating to the stock with a target price of | 4270/share, valuing the company at 45x FY23E earnings. Key Financial Summary | Crore FY19 FY20E FY21E FY22E FY23E (CAGR 20-23E) Net sales 2984.5 4400.1 6268.2 11843.8 16539.2 55.5 EBITDA 134.9 223.1 302.5 554.1 814.5 54.0 EBITDA Margin(%) 4.5 5.1 4.8 4.7 4.9 Net Profit 63.3 120.5 173.1 367.6 549.5 65.8 EPS (|) 11.2 20.6 29.6 62.8 93.9 P/E(x) 324.0 176.1 122.6 57.7 38.6 RoE (%) 16.7 22.3 25.4 37.6 38.6 RoCE (%) 22.4 26.3 26.3 40.1 43.9 Source: ICICI Direct Research, Company Stock Tales | Dixon Technologies (India) ICICI Direct Research Company Background Business profile Dixon Technologies (DTL) was started in 1993. In 1994, the company commenced manufacturing of colour television. At present, DTL’s six business segments 1) consumer electronics (mainly TV), 2) lighting solutions (LED lights), 3) home appliances (washing machines), 4) mobile & EMS, 5) security devices (CCTV, DVR), 6) reverse logistics contribute 48%, 26%, 9%, 12%, 5% and 0.4%, respectively, to the company’s total topline. The company mainly operates through two business models: 1) original equipment manufacturer (OEM), 2) original design manufacturer (ODM). The ODM revenue contribution for the company increased from 22% in FY17 to 38% in FY20. This is largely due to expansion in backward integration and improved ability in designing & developing products through in-house R&D. While a significant chunk of the business comes from the OEM business, the company has increased focus on increasing the mix of ODM share in consumer electronics and lighting business in future. Marquee clients include global MNCs such as Samsung, Xiaomi, Motorola, Panasonic, Phillips, etc and domestic majors such as Voltas-Beko, Havells-Lloyd, Godrej, Bajaj Electricals, Crompton Greaves, etc. DTL recorded strong revenue CAGR of 39% in FY17-20 to | 4400 crore led by 35%, 28% and 27% revenue CAGR in the consumer electronics, home appliances and lighting segments, respectively. The company has a strong balance sheet with a stringent working capital cycle of a mere six days along with RoCE & RoE of 26% and 22%, respectively. Exhibit 1: DTL’s business profile Revenue ODM Share Production Capacity FY20 Capacity % of Product Product discription EBITDA contr. % of (%) of Revenue CAGR (mn units/annum) Revenue total industry (| crore) Margin total segment (FY17-20) Smart TVs, ultrahigh Consumer definition,commercial 3.6 2095 2.4% 48% 6% 35% 26% Electronics and signage display Bulb- 240 Lighting Indoor lighting and LED Batens- 24 1140 8.6% 26% 87% 27% LED- 45% Solutions bulbs Downlighters- 6 Washing machines- Home Semi auto-1.2 Semi automatic, top 396 11.6% 9% 100% 28% 28% appliances Top loading- 0.6 loading Mobile & Feature phones Feature- 27 537 3.6% 12% Nil NM 10%** EMS Smart Phones Smart phone- 3 CCTV, Digital Video Security CCTV- 27 Recorders 216 3.3% 5% 100% 93%* 25%^ Devices DVR- 1.8 (DVRs). Repair & Refurbishment - Reverse Set up box, Mobile - 16 16.9% 0.4% NM NM _ Logistics phones, LED Tv Source: Company, ICICI Direct Research, * YoY growth in FY20, ** plans 5x expansion in smart phone capacity in next two years, ^ value market share ICICI Securities | Retail Research 2 Stock Tales | Dixon Technologies (India) ICICI Direct Research Exhibit 2: Major clientele as on FY20 Source: Company, ICICI Direct Research, Exhibit 3: Journey of Dixon so far Mid to late 90's 2000-2008 2008-2010 Last 10 years Assembly CTV and VCR Added assembly of PCBs, Added ODM for CTV, Started LCD/LED TVs, Capability assembly started DVDs, CFL bulbs & STBs DVD & CFL bulbs Mobile Phones, CCTVs Joined hands with Acquired leading Indian 1st Indian company PLI, Significant client addition, Achievements the Global Consumer Consumer Durable brands to develop STB-ODM exploring export oppertunities Electronics Giants as Customers solution First manufacturing Washing Machine & LED Established Multilocation Started Sheet metal & Manufacturing facility operational at Lighting, Magnetic and power footprint plastic moulding Noida supplies , Security Cameras Prescriptive ODM & Operational High Value- Added EMS Backward Sophistication Products Operations Integration Source: Company, ICICI Direct Research, ICICI Securities | Retail Research 3 Stock Tales | Dixon Technologies (India) ICICI Direct Research Investment Rationale Indian EMS industry: Ready to fly According to the Electronic Industries Association of India (ELCINA), the Indian electronic manufacturing services (EMS) industry is valued at ~US$23.5 bn (in FY20) and represents ~3% of the global EMS industry (valued at US$832 bn). Globally, EMS service providers offer consumer durable brands flexibility in product design updates, faster time to market, cost effectiveness, avoid manufacturing challenges besides offering value added services like design services. In India, the EMS industry is likely to record robust growth of 45% in the next five years to cross ~ US$152 billion mark by 2025. This is largely supported by various government measures to boost domestic manufacturing in addition to China +1 strategy of various multinational companies. Over the last many years, India has remained dependent on import to fulfil its domestic requirement of electronic goods. However, domestic production of electronic goods reported phenomenal growth of ~19% in the last five years. In FY20, India produced ~US$75 billion worth of electronic goods of which EMS value contribution was at ~US$23.5 billion. India also imported ~US$53.5 billion worth of electronic goods in FY20 of which ~US$17 bn was of EMS value .We believe with strong domestic demand and significant export opportunities of electronic goods (electronic goods production to surpass the US$400 bn mark by 2025, and ~US$100 billion worth of mobile phone to be exported from India), the EMS industry in India is likely to receive a significant fillip (~45% growth) in the next five years.